The Multinational Monitor


S O U T H   A F R I C A

Direct Investors Go Slow On South Africa

But Banks Renew Interest

by Patrick Lawrence

American multinational corporations, notably bullish on investment in South Africa during and after previous periods of crisis in the minority republic, appear to be quietly reconsidering the wisdom of long-term investment in the apartheid regime's future.

At the same time, in an effort to upgrade its standing as a credit risk, South Africa has become newly active in the European credit markets.

While U.S. investment in South Africa grew fourfold in the 1970s to its current U.S.$2 billion, it has been more or less static, even showing a slight net disinvestment, since year-end 1978. Political and economic analysts, business executives and government officials view the current period as a possible turning point for the 300 or so large U.S. companies with significant operations there. U.S. multinationals may have reached a point at which the political risks at home and in South Africa, as well as the level of investment now required to establish an operation or expand existing facilities, may outweigh even the fast return on investment and the impressive profit margins that have traditionally been South Africa's principle attractions to overseas investors.

Government figures and other indicators suggest that business executives are currently making decisions to limit their South African commitments-possibly (although not necessarily) as a prelude to disinvestment later in the decade. "The smart money is committed for no more than five years," one Washington-based analyst said. "That is what distinguishes the present phase in U.S. corporate thinking."

What is striking about the trend is that it is taking place during the country's strongest economic revival in the entire postwar period. Fueled by the soaring price of gold, South Africa's gross domestic product is expected to rise 7 percent this year. In the quarter ended last September, foreign currency reserves rose almost 50 percent, to more than $900 million. Including government-held gold, total foreign reserves are some $6 billion. In the private sector, fixed investment will be up more than 10.5 percent in 1980.

In spite of such buoyancy, however, U.S. corporations, and to a lesser extent their European counterparts, are hanging back, if not yet disengaging. In the August issue of Survey of Current Business, the Commerce Departments Bureau of Economic Analysis reported total direct investments by U.S. companies of $2.011 billion in 1979. This compared with $1.968 billion the previous year. The survey notes, however, that $230 million of U.S. affiliates' earnings were re-invested, up from $89 million the previous year.

In 1978, U.S. companies showed a net inflow of investment to South Africa of $71 million. In 1979, there was a net outflow of $164 million.

The picture that emerges is simple: U.S. corporations have stopped new investment in South Africa, and what investment there has been since the end of 1978 is accounted for by the re-investment of locally earned profits. "There's an increase, but its not a significant amount when you consider reinvested earnings," a Commerce Department official said privately. "We don't know of a whole lot of new investment going into the country." -

In South Africa, one barometer of investor confidence abroad is the discount on the so-called financial rand. The financial rand is South African currency available to foreigners at a discount from normal exchange rates, a mechanism introduced in January, 1979, to encourage overseas investors; the discount deepens as demand drops. After a year of unprecedented labor actions and a summer of sporadic political violence, the financial rand was down to just U.S. 80 cents last August, while commercial exchange rates at the time were one rand to just under U.S.$1.30.

Part of the dramatic decline was attributed to a temporary lack of direction in gold markets, but it was also clearly being affected by concern over the political situation.

Indeed, the confusion among bullion buyers was itself related to South Africa's smoldering political confrontation. In London markets, dealers said at the time that investors were demanding a 25 percent return on investment in South African gold shares, as opposed to 15 percent a few months earlier. In New York, a prominent gold analyst, .lames Sinclair, once urging South African investments, recently began advising clients to sell off all South African holdings-securities as well as gold. "In our view," Sinclair wrote in a newsletter circulated to customers, "the potential difficulty that South Africa is experiencing isn't a minor or localized affair."

The problems generated at home by continuing relations with South Africa-public criticism, shareholder dissent--have not been severely threatening, but they have been persistent. Far more important, however, are problems now emerging in South Africa itself.

Chief among these has been the government's apparent unwillingness thus far to implement the mild reforms that business executives-South African and foreign alike-view as necessary to stem the growing radicalization of black South African workers. Business saw its salvation in policy shifts expected in the immediate postVorster era; those shifts have not materialized.

The failure of the "Sullivan Principles"-voluntary employment guidelines drawn up in 1977, designed to make U.S. business activity under apartheid more acceptable-has compounded U.S. business headaches. The Sullivan Principles have never won much support, either among apartheid critics at home or among black South African workers.

The problems are two: the code is a rather toothless set of suggestions having to do with wage and workplace discrimination; it lays out no practical steps as to implementation, and corporate executives have come up with all manner of "on-line" difficulties in putting the principles into practice.

Second, the code itself has not even won wide support among the corporations. Only 140 of the 300 major U.S. firms active in South Africa even claim to have taken the pledge to abide by the principles-a performance record that has incurred the wrath of Rev. Leon Sullivan, the author of the code and a member of General Motor's Board of Directors.

Business executives view the growing black trade unionism as a direct result of these failures. The development of powerful black labor organizations could increase wage costs significantly for multinationals. Political costs are even more threatening.

"I would prefer to see black unions working with worker welfare rather than broad political issues," a multinational executive recently said to Business International. "But there is always a real possibility in South Africa that blacks, frustrated as they are in other spheres, will use unions for political purposes. The government is very concerned about it and hopes to prevent it by the system of union registration, but whether it will succeed in doing so is another matter."

That attitude, along with comments by more than two dozen other leading executives, was contained in a lengthy report on investment in South Africa issued last month by Business Europe of Geneva, the European division of New York-based Business International Corporation. Among its conclusions, the study views the response of multinational companies to black labor organizations as the single issue on which foreign concerns will win or lose the decade.

Business International's assessment is more striking in its broader conclusions on the shape of South Africa in the 1980's. Its forecast will be least appetizing to U.S. executives. For the next decade, the study states, the government will continue to fail in meeting black demands for racial reform, and black resistance will consequently increase. There will be neither gradual nor radical change, but a state of "violent equilibrium." This condition, the report notes, is what South Africa has already been experiencing since the Soweto uprisings of 1976.

South Africa's failures in the matter of economic reforms for blacks have also created a serious shortage of skilled labor that threatens to retard any future economic upswings. Indeed, industry predicts a shortage of 700,000 skilled workers in 1981. Because high gold prices have spurred a burst of expansion in South African mining, that industry is already feeling the effects of the shortage. '

With business clamoring loudly for educational reforms, the government may move to educate blacks sufficiently to allow them to fill the growing need for skilled labor. In the next 20 years, the percentage of whites in the work force will drop from 21 percent to 16 percent, according to one South African economist. But in the short term, few economists are forecasting much relief.

This skilled labor shortage will not only deter future investment; it will also increase costs on current investment. "Anyone planning investment in South Africa must be prepared to put substantial sums into social-responsibility programs, particularly in education, because the South African system has not done it," the chief executive of one U.S. auto company with investments in South Africa said. "You have to spend money to train blacks, especially now that whites are leaving factory jobs."

Concerned over domestic unrest and the apparent beginnings of a shift in the attitudes of multinational corporations, the apartheid government has chosen to enter the Euromarket for the first time since 1976--and for its first sizable borrowing since 1972. South Africa is currently finding commercial banks to be receptive partners in the efforts to restore its image as an acceptable medium-term risk.

The government announced its first borrowing just two days after the bombing of an oil refinery and two synthetic fuel plants in June.

The credit was a $52 million Eurobond issue floated on the West German capital market. Both the interest rate, at nine percent, and the term of the loan, at seven years, are significant.

Timed to reflect the current economic upswing, the loan was intended to demonstrate that international markets do not place a high premium on South Africa's political factor. The nine percent yield was' three-quarters of a percentage point above prevailing rates. The last time out, in 1976, following the black uprisings in Soweto, South Africa was paying twice that premium for loans limited to five years.

In August, the South Africans again entered the credit market, this time to obtain a $250 million loan from a syndicate of banks led by West Germany's Dresdner Bank and including Citibank, Barclays and the Union Bank of Switzerland. The loan, said to be for financing housing and education projects for blacks, was extended for seven years at a-very competitive interest rate.

The August loan is revealing for two reasons. First, it signals a sort of rehabilitation of South Africa as an international borrower. As the Citizen, a South African daily with close ties to the government, said: "The $250 million Eurodollar loan ... is turning out to be an excellent public relations exercise for the country."

What is more, South Africa's finance minister, Owen Horwood, sought to maximize the message by spreading the loan over a well-mixed syndicate that took in four major Western countries. Certainly, South Africa did not need the loans for strictly economic purposes. As Horwood explained at this fall's meeting of the International Monetary Fund in Washington: "it is always a good idea to keep your name on the capital market, even when your country's economy is in as good shape as ours."

The loan is also aimed at alleviating some of the very conditions that are now causing businesses to pause.' By designating the funds for housing and education programs, the banks and South Africa reap publicity benefits. For the banks, the loans are easier to defend against anti-apartheid critics. For South Africa, the loans appear as an endorsement of its reform policies.

Bank of America is currently considering a loan for similar purposes. It is weighing a $400 million credit to redevelop the black township of Alexandra. "Only blacks who could afford to buy their own homes would be able to live in Alexandra," the Johannesburg Star reported one observer saying. Black South African sources, critical of the loans, say that, in effect, Bank of America would be financing the removal of lease holders in order to make Alexandra, which is within Johannesburg city limits, available to the tiny number of middle class blacks.

Patrick Patrick Lawrence is a New York-based journalist who writes on financial issues.

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